Q3 2024 Air Lease Corp Earnings Call
[inaudible]
Thank you. Bye bye.
Audra: Good afternoon. My name is Audra and I will be your conference operator today.
Audra: At this time, I would like to welcome everyone to the Air Lease Corporation's second quarter earnings conference call.
Audra: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again.
Speaker Change: I will now turn the call over to Mr. Jason Arnold, Head of Investor Relations. Mr. Arnold, you may begin your conference.
Speaker Change: Thanks, Audra, and good afternoon, everyone, and welcome to Air Lease Corporation's third quarter 2024 earnings call.
Speaker Change: This is Jason Arnold. I'm joined today by Steve Haase, our Executive Chairman. John Plueger, our Chief Executive Officer and President.
Speaker Change: This conference call is being webcast and recorded today, Thursday, November 7, 2024, and the webcast will be available for replay on our website. At this time, all participants to this call are in listen-only mode. Before we begin, please note that certain statements in this conference call
Speaker Change: including certain answers to your questions or forward-looking statements within the meaning of the Private Securities Litigation Reform Act.
Speaker Change: This includes, without limitation, statements regarding the state of the airline industry, the impact of aircraft and engine delivery delays, and manufacturing flaws, including as a result of the Boeing labor strike.
Speaker Change: our aircraft sales pipeline, and our future operations and performance. These statements and any projections as to our future performance represent management's current estimates and speak only as of today's date. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations.
Speaker Change: Please refer to our filings with the SEC for a more detailed description of risk factors that may affect our results.
Speaker Change: Air Lease Corporation assumes no obligation to update any forward looking statements or information in light of new information or future events.
Adjusted diluted earnings per share before income taxes.
and adjusted pretext return on equity, which are non-GAAP measures.
Speaker Change: A description of our reasons for utilizing these non-GAP measures, as well as our definition of them and the reconciliation to corresponding GAP measures can be found in the earnings release and 10-Q we issued today.
Speaker Change: Additionally, given ongoing litigation, I'd like to ask everyone to not ask any questions about our Russia fleet insurance claims.
Speaker Change: As a reminder, unauthorized recording of this conference call is not permitted. I'd now like to turn the call over to our Chief Executive Officer and President, John Plueger. John? Thank you, Jason. Well, good afternoon, everyone, and thanks for joining our call today.
John Plueger: During the third quarter, Air Lease generated revenues of $690 million, and we generated 82 cents in diluted earnings per share.
John Plueger: Our results benefited from the continued expansion of our fleet, partially offset by lower end-of-lease revenue as compared to the prior year.
John Plueger: We purchased 20 new aircraft from our order book during the quarter, adding $1.9 billion in flight equipment to our balance sheet, and sold 9 aircraft for approximately $340 million in sales proceeds.
John Plueger: The weighted average age of our fleet declined slightly quarter over quarter to 4.6 years, while the weighted average lease term remaining extended slightly to 7.1 years.
Our fleet utilization rate remains exceptionally strong at 100%.
John Plueger: Our $1.9 billion in order book deliveries came in very close to the $2 billion we tell you to expect for the third quarter, as our outlook reflected anticipated impact from OAM delays, including the Boeing strike.
John Plueger: Despite the strike, this was a record quarter for ALC by CAPEX for new aircraft deliveries.
John Plueger: We're pleased that the strike is now over and Boeing can move forward.
John Plueger: I do want to just remind you that it will take some time for Boeing to restart the max production lines and return to prior build rates.
John Plueger: Deliveries of 787s are ongoing, and in fact, we took delivery of four of them, 1-9 and 3-10s during the quarter.
John Plueger: We currently expect to receive approximately $900 million of deliveries in the fourth quarter of this year.
John Plueger: Assuming so, it would mean approximately $4.6 billion deliveries for the full year 2024.
John Plueger: So within the $4.5 to $5.5 billion range, we guided you at the beginning of the year, and in fact very sizable relative to the $26 billion fleet we had at the end of 2023.
John Plueger: As for our outlook for 2025, we'll have more detail for you here when we report our fourth quarter results in February.
John Plueger: With our expected deliveries, our forward order book is fully placed through 2026.
John Plueger: Our young current fleet, combined with our sizable order book of new aircraft delivering through 2029, remain a key source of strength for air release, given Boeing and Airbus are largely sold out through the rest of this decade and the challenges limiting new aircraft production.
John Plueger: As a result, and a product of this environment, airline demand continues to meaningfully outpace supply. And as a result, we are continuing to place aircraft at strong lease rates compared to prior several years.
John Plueger: We expect aircraft supply constraints to persist for at least the next three to four years and are remaining very tactical with our remaining placements in order to maximize lease rates and optimize customer mix.
John Plueger: Robust commercial aircraft demand also continues to benefit our aircraft sales activity.
Our sales pipeline remains very strong at 1.5 billion.
John Plueger: We expect approximately $400 million of sales for the fourth quarter, which should result in about $1.5 billion of sales for the full year, again within our guidance range we provided.
John Plueger: It is important to reiterate the fact that sales timing can be difficult to predict given the various moving parts.
John Plueger: And gains percentages will vary by the timing of individual aircraft that close within sales packages. And in that regard, you can see the gain on sale margin this quarter was meaningfully higher relative to the prior quarter.
John Plueger: As we noted earlier this year, lease extension activity remains very high and our 2024 lease maturities are a limited number.
John Plueger: The result this year has been lower end-of-lease revenue as compared to the prior year.
John Plueger: which, while in the short term, impacts revenues, the longer term benefits of reduced time off lease, no reconfiguration expenses, lower transition-related costs, and strong current lease rates on extensions are highly positive contributors to the economic returns on these assets.
John Plueger: The higher lease rates on lease extensions further bolsters the gains realized when we sell those aircraft, which is typically not significantly longer after the lease extension is signed, given our fleet focus of holding our aircraft for the first third of their economic lives.
John Plueger: Even though our lease maturities will be noticeably higher in 2025, we would not expect a dramatic rebound in end-of-lease revenue, as most of these leases are expected to be extended with their current airline customers.
John Plueger: One very brief comment I'd like to just add on our management business, we're pleased with our management business strategy and we continue to look at opportunity to expand that business over time.
John Plueger: Looking ahead to 2025 and beyond, we remain very optimistic about the performance of our business.
John Plueger: Fed rate cuts continue, as you saw earlier today, which we expect to benefit financing costs as the yield curves continue to normalize.
As we've told you in the past,
John Plueger: Despite the lag time to fully impact our overall lease margins, we remain enthused by the lease rates we are signing on new aircraft and on lease extensions, in addition to recognition of solid gains on sale, all benefiting meaningfully from the continued commercial aircraft supply, demand, and balance.
John Plueger: which we do not expect to resolve for multiple years into the future.
John Plueger: We believe our young, existing $28 billion fleet, combined with our $18 billion order book of new technology and fuel-efficient aircraft,
John Plueger: positions, all acquired with significant volume and launched customer discounts, positions us well for the future.
Speaker Change: I'd like to turn the call now over to Steve Haase. Steve?
Thank you very much, John.
Steve Haase: Our team, as well as John and myself, continue to travel the globe extensively to meet with current and potential new airline customers.
Steve Haase: by the steady and solid demand for the new commercial aircraft comprising of our fleet and our forward order book.
Long-term drivers of this demand remain strong.
Speaker Change: which, as John mentioned, are supporting very attractive and improving lease rates on our new aircraft placements.
Speaker Change: Customer requests for additional aircraft, meanwhile, are consistently high in volume as well.
Speaker Change: In addition to typically being the highest demand segment of the market,
Speaker Change: Air Lease's new aircraft focus also meaningfully limits impairment risk of our business.
Speaker Change: while our cautious approach toward credit has limited exposure to some of the riskier airlines, including a few of the more challenged LCCs and ULCCs.
Speaker Change: We're excited about the value proposition of our fleet and our order book in this strong demand environment.
Speaker Change: Our new aircraft are directly purchased from the OEMs at significant volume discounts.
Speaker Change: providing us meaningful embedded value in these assets and boosting our lease yields.
Speaker Change: Our orders were placed well prior to the run-up in aircraft demand, further bolstering values in the current market.
Underpinning aircraft demand is continued overall strength.
Speaker Change: in passenger traffic, as seen in global air traffic volumes, which rose about 7% year-over-year, according to the latest IATA data report.
Total international volume was up about 9%.
with Most Markets Continue to Use.
and rise at double-digit or near double-digit rates.
Asia-Pacific traffic remains the strongest growing market, expanding 19% year-over-year.
Speaker Change: We continue to expect Asia-Pacific international travel growth to remain one of the strongest globally as international traffic in the region gains further momentum.
Speaker Change: International traffic in Latin America, Africa, and Europe also remain robust.
Speaker Change: Domestic traffic is still very healthy in terms of growth at 4% year-over-year with China, Brazil, and India among the leaders in domestic market growth.
Speaker Change: Passenger load factors also continue to expand with many markets achieving new record levels in the mid 80% and higher ranges.
Airlines want and need our new technology aircraft.
Speaker Change: New aircraft provide a 20-25% lower fuel burn relative to the prior generations of aircraft.
Speaker Change: while elevated environmental focus incentivizes airlines to operate the most fuel-efficient aircraft.
Speaker Change: Brand new aircraft are the only direct means of reducing emissions for an airline, and some airport landing fees, such as those at London Heathrow and others in Europe, are assessed partly on emissions of the aircraft type and operation.
Speaker Change: Unlike some of the exotic ideas for reducing emissions, most of which is unlikely to have a real-world application or impact for years, if not decades, into the future,
Speaker Change: New aircraft are the only direct means of addressing the environmental issue today.
Speaker Change: For example, SAF is a great idea, but it has a very long way to go before it is available to any degree in volumes to make it a meaningful impact on the industry.
Speaker Change: Alternative aircraft and engine designs are decades away from implementation and certification.
Speaker Change: Electric powered aircraft are currently not feasible given technology and weight challenges which make them unpalatable for commercial airline operations for 99% of passenger routes in the world.
Speaker Change: Not to mention the fact that in most countries in the world, the electricity required to charge these aircraft batteries would likely come from more traditional high-emission sources of energy.
Speaker Change: You've heard us with this consistent messaging for many years now.
Speaker Change: I'm often asked at forums if there's anything else that could be done to improve aircraft efficiency in the interim prior to further dramatic technological advances.
The answer is absolutely yes.
Speaker Change: But the solution does not have anything to do with the aircraft, engines, fuel type, or the airlines themselves.
Speaker Change: There's one highly resolvable and visible issue that's sitting right under the noses of aviation regulatory bodies and governments globally.
And that is air traffic control and flow optimization.
Speaker Change: A recent analysis conducted by Eurocontrol suggested that the average departure delay is now up to 18 minutes.
Speaker Change: while arrival delays are averaging 60 minutes in Europe. These are totally attributable to ATC matters, not weather or other operational considerations.
Speaker Change: Much of this time, aircraft and engines are running, wasting fuel, money, and engine life, and creating unnecessary emissions and higher operating costs, not to mention the inconvenience to the passengers.
as it is fully under their control.
This is low-hanging fruit.
Speaker Change: If the planned flight time is around 1.5 to 2 hours on average in Europe, the savings potential across the board could be very meaningful.
Speaker Change: While the industry should focus on pushing the envelope on new ideas and technologies for the longer term,
Speaker Change: Airlines right now can primarily focus on operating the most economical aircraft.
Speaker Change: like those in ALC's Fleet and Order Book, while secondarily pushing on the institutions that can influence improvement in the global air traffic control system for these meaningful incremental benefits.
Speaker Change: To wrap up my comments, I'd like to reiterate our strong confidence in the long-term strength of our business.
Speaker Change: We look forward to continued normalization of the yield curve and to the sizable deliveries remaining from our forward order book, which we expect to further bolster asset yields and drive profit margin growth for Air Lease.
Speaker Change: Both of these should benefit our return on equity and earnings growth profile in the future.
Speaker Change: reflective of our performance and the outlook for positioning of our business.
in our quarterly cash dividend distribution by roughly 5%.
Speaker Change: to $0.22 per share per quarter, commencing in table in early January 2025.
Speaker Change: I'd now like to turn it over to our CFO, Greg Willis, for his comments on our results.
Greg Willis: Thank you, Steve, and good afternoon everyone. During the third quarter, AirLease generated total revenues of $690 million, which was comprised of approximately $625 million of rental revenues and $65 million from aircraft sales, trading, and other activities.
Greg Willis: Total revenues rose by approximately five percent as compared to the prior year's quarter benefiting from the growth of our fleet, partially offset by lower end-of-lease revenue.
Greg Willis: Our portfolio yield, net of end-of-lease revenue, maintenance reserve revenue, and lease cost amortization remained relatively flat as compared to the second quarter.
Greg Willis: During the third quarter, we recognized a $12 million decrease in inter-lease revenue as compared to the prior year period.
Greg Willis: As we've discussed previously, we've had very limited lease expirations in 2024, and most leases scheduled to expire were extended as a product of the strong demand environment that we are currently experiencing, resulting in very limited end-to-lease revenue recognized in the period.
Speaker Change: As John touched upon earlier, our strong lease extensions are supportive of our overall portfolio yield and add to the contracted cash flows, further enhancing the value of these aircraft.
Speaker Change: Sales proceeds for the second quarter totaled approximately $340 million for the sale of nine aircraft.
Speaker Change: These sales generated $42 million in gains, representing roughly a 14% gain on sale margin.
Speaker Change: As we have said in the past, gain on sales margins will vary from quarter to quarter based upon the mix of aircraft sold and market conditions.
Speaker Change: Based on our sales pipeline, we continue to expect to see healthy gain on sale margins towards the upper end of our historical range of 8 to 10 percent.
Speaker Change: These gains continue to reflect the significant value embedded in our fleet, which is carried on the balance sheet as historical costs netted depreciation.
and the next episode of the
Speaker Change: Moving on to expenses, interest expense rose by roughly $42 million year over year, driven by a 54 basis point increase in our composite cost of funds to 4.21% at quarter end.
Speaker Change: Increased financing costs was the primary contributor to the year-over-year increase in expenses. This increase was partially due to us approaching our fixed floating rate debt target of 80% through the utilization of floating rate bank debt, which is, as we said in the past, prepayable.
Speaker Change: In the future, as we turn out these financings in the bond market, we expect to recognize a benefit in our composite cost of funds.
Speaker Change: We do continue to significantly benefit from our largely fixed rate capital structure, which has helped to moderate the impact of the interest rate environment witnessed over the last couple of years, with 81% of our financings carrying fixed rates at quarter end.
Speaker Change: Clearly, further reductions in the Fed Fund's rate will also benefit our financing costs, as we look forward to the benefits of a further yield curve normalization on our business, which should be supportive to our return on equity.
Speaker Change: Depreciation expense continues to track the growth of our fleet. SG&A expense rose slightly relative to the prior year. However, as a percentage of revenue, it declined slightly relative to the prior year's quarter to 6.4% of revenue.
Speaker Change: as well as being down as a percentage of revenue on a year-to-date basis.
Speaker Change: Moving on to financing activities for the quarter, in mid-September we issued $300 million
Speaker Change: Subsequent to quarter end in mid-October, we used the majority of these proceeds to redeem our outstanding $250 million Series A preferred stock, which had a reset to a floating rate instrument earlier this year.
Speaker Change: We were very pleased to redeem our Series 8 issuance, which on an annualized basis after the reset date carried a cost of approximately 9%.
Speaker Change: I'd like to add the 6% rate on the Series D issuance, actually priced slightly inside of the original Series A that we completed five years ago in a much different financing environment.
Speaker Change: Our debt-to-equity ratio at the end of the third quarter was 2.63 times on a gap basis, which net of cash on the balance sheet is approximately 2.57 times. Both were down relative to the prior quarter, driven by the timing of the Series A redemption taking place in October.
Speaker Change: We will continue to prioritize the use of proceeds from the sale of aircraft to pay down debt with the goal of reaching our long-term debt to equity target over the medium term. Our strong liquidity position of
Speaker Change: $7.5 billion, $30 billion of unencumbered assets, and $30 billion of contracted rentals remain key pillars to the strength of our business.
Speaker Change: In conclusion, we continue to see significant value in our fleet and order book as a product of the ongoing OEM challenges.
Speaker Change: and strong airline customer demand. This environment is supportive of attractive lease rates, all while we are placing and extending a meaningful number of airplanes.
Speaker Change: Echoing Steve and John's commentary, a further normalization of the interest rate environment at the front end of the yield curve should also benefit our return profile of the business. With that, I'll turn the call back over to Jason for the question and answer session.
Speaker Change: Thanks, Greg. This concludes our prepared commentary and remarks. For the Q&A session, we ask that each participant limit their time to one question and one follow-up. Operator, please open the line for the Q&A session.
Speaker Change: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star then the number 1 on your telephone keypad.
Speaker Change: We'll take our first question from Jamie Baker at J.P. Morgan.
Jamie Baker: Well, thanks everybody. Good afternoon. So John and Steve, just thinking back to Farnborough, you know one interesting conversation that Mark and I had with one of the OEMs was, I mean the idea being thrown around was that maybe, and I emphasize maybe, the OEMs had given too much business to
Jamie Baker: To all the various lessors, you know around the world and once production eventually, you know begins to ramp up You know, perhaps the OEMs will concentrate their efforts on just the largest
Jamie Baker: platforms out there. And obviously, you know, Airways would make that cut. But as you think about the interplay between the OEMs and some of the smaller platforms, I mean, do you think anything changes between now and, I don't know, the end of the decade?
Speaker Change: That's a really good question, Jamie, because, as you recall, during the time when John Leahy
led the global aircraft sales and marketing activity at Airbus.
Speaker Change: He was very, very focused on expanding the number of customers, both airlines and less SOARs.
Speaker Change: And he was also very focused on gaining market share vis-a-vis Boeing, particularly in the single aisle area.
So consequently, Airbus did a lot of selling.
Speaker Change: at the end of the previous decade, leading all the way up to the pandemic.
Speaker Change: and expanded their customer base of Les Soeurs by more than double of where it was, say, ten years ago.
Speaker Change: At the same time, of course, they brought in a lot of customers and, in fact, replaced a lot of 737 operators with Airbus A320 family aircraft.
Speaker Change: However now with the huge demand from the airlines resulting from traffic growth and the fact that we have the stagnation during the pandemic
Speaker Change: I think both OEMs are now focused on quality with less source rather than quantity.
Speaker Change: And I think they're meaningfully looking at the placement capability of the left sores.
Speaker Change: to airlines and to broadening the market base for their products, not just a quantitative increase in selling to less source. So we're seeing this trend and we believe it's very, very beneficial to air lease.
Speaker Change: Since we're the only Lessor that has launched a whole range of both Airbus and Boeing airplanes as the first customer.
Speaker Change: And secondly, we have brought a lot of new airline customers to both Boeing and Airbus that theretofore did not operate those types of aircraft.
Speaker Change: Steve, I appreciate that. Thank you very much. And then second, admittedly, I sort of come from a U.S. airline perspective or bias, but, you know, I've often thought about sale lease tax as more of a, I don't know,
Speaker Change: reserved for times of strain. You know, I'm thinking back to the Southwest deals that they had to do when fuel prices collapsed, Delta during COVID, you know, that sort of thing. But it's increasingly, it seems to be...
part of the regular way of doing business.
Speaker Change: Obviously, Frontier are heavily dependent on sale lease backs, Southwest leading into it. Just curious how you're thinking about that broader sale lease back market as it relates to air lease. Thanks in advance.
Speaker Change: I don't think there is going to be really that much departure from kind of your historical view in that We're now in a period where airlines have ordered a lot of aircraft or taking deliveries
Speaker Change: At the same time, there have been some profit warnings from a few of the airlines around the world, which, by the way, we don't see in terms of demand to us at all.
Speaker Change: But, with that, I do expect that the airlines will look to sale leaseback financing because they have more to finance. There's just more to get done.
Speaker Change: And so that's really, you know, of no surprise. At the same time, you know, we're constantly asked for more aircraft from all of our customers globally.
Speaker Change: is not impacting our order book business, you know, at all. The demand remains very, very strong.
Speaker Change: Just to add a couple of observations to what John just said, if you look back over the last five or six years, Jamie, and you look at those airlines that grew the fastest,
Speaker Change: And they were low-cost and ULCC carriers like Wizz Air and EasyJet.
Speaker Change: and airlines in the U.S. like Frontier and Spirit relied almost totally on sale-leaseback transactions.
and one of the attractions was that
Speaker Change: And then they sell those assets, that delivery, at a higher price. So they actually have a cash gain. Indigo in India is probably the best example of that.
Speaker Change: A big part of Indigo's balance sheet was the gains that they were able to generate through the state leasebacks right up front in terms of cash. Now, yes, they have to amortize that gain over the life of the lease.
but the liquidity benefits to these airlines from saleesbacks
significantly added to their growth.
Speaker Change: And some of the carriers, like Frontier and Spirit, almost every one of their airplanes is leased. They have very few owned aircraft. Same thing with Wizz Air in Europe.
It was an interesting trend
Speaker Change: And as John said, with the insatiable appetite for aircraft and capital, airlines will continue to use the sale-e-spec methodology as a powerful tool.
Jamie Baker: Steven, John, I appreciate it. Thank you for the perspectives. Take care. Sure, thanks, Jamie.
We'll move next to Terry Maw at Barclays.
Terry Maw: Hi, thank you, good afternoon. So your profit margin this quarter was right in line with your guide of flattish for the year. I'm thinking as we kind of look forward and think intermediate and long term, is there a normalized or through the cycle profit margin we should be thinking about?
Speaker Change: and kind of what are the drivers and time frame of kind of getting there. Greg?
Thanks, Terry.
We haven't given a guide for 2025 yet.
Speaker Change: There are some things that are working on the positive side, which I'll go through shortly. I mean, very clearly, we have the delivery of airplanes in our order book, which have great leases on them. We have the extension or the lease expiry opportunity where we have a significant amount of airplanes that are coming up for renewals, which we think a lot of them will stay with the existing customers.
Speaker Change: And we think we're able to use that as an opportunity to increase lease rates there as well. We have a great pipeline of aircraft sales with very healthy valuations on those as well. And the last piece of the puzzle really is with interest rates. We have 80% of our debt fixed.
Speaker Change: We're benefiting from the 75 basis points in Fed cuts so far this year, which should help. But if you look at our debt book of 20 billion and you say,
Speaker Change: $28, $29 million annually. So I think those are all very positive things. We do have some refinancings to do.
Speaker Change: But today's long-term financing rates are a lot lower than they were 18 months ago. So I think there's benefits on the financing side as well to take out some of that.
Speaker Change: Floating Rate Bank Debt that we that we put on as well So I think those are all positives and we'll hold off on giving further guide on where long-term margins should be But over time we'd like to see them continue to improve
Speaker Change: Got it. That's helpful. And maybe as a follow-up, if I ask this a different way, if I look at your profit margins pre-pandemic in 2019,
Speaker Change: They were in excess of 30-35%. Has anything structurally changed in the industry or your business, whether it's geographical mix or anything else, that would kind of prevent you from getting back there?
Speaker Change: No, I don't think so. I think we're having to work through some COVID-era restructurings, COVID-era lease placements that we're working through. But over time, we're continuing to push yields higher. And I think the thing that we have working for us
Speaker Change: is that we have a great demand environment, right? We have a huge demand for airplanes.
Speaker Change: There's a scarcity due to supply, demand and balance with what's going on with the OEMs, creating a ton of value for the airplanes that we have in our fleet plus on order. So I think all of those things are positive. I think it just takes time to work our way through some of those COVID-era deals I mentioned earlier.
Great, thank you.
We'll move next to Hilary Cacanondo at Deutsche Bank.
Hilary Cacanondo: Hi, thanks for taking my question. You've mentioned that market lease rates are continuing to go up.
Hilary Cacanondo: Do you think that there will be a point where airlines push back and say, you know, no, these rates are just too high, you know, we're not taking them? Or from your experience, do you think it's more important for these airlines to get the aircraft and so, you know, they'll take the aircraft no matter how high the lease rate?
Speaker Change: Hillary, thanks. I'll take that. Hillary, I can tell you that for 39 years, airlines have consistently told me my lease rates are too high.
Speaker Change: And the short answer is no. Leasing, the leasing element is a relatively small portion of the P&L cost to all airlines.
Speaker Change: There still remains a competitive environment across less soar, so airlines do have their choice.
But even a 10% increase in lease rates is absolutely
Speaker Change: It's nothing to even talk about. So no, airlines will always say lease rates are getting too high, but the behavior of our placements and the continued appetite that we have and the deals we're achieving would argue otherwise.
Speaker Change: Great, that's great to know. And then recently we saw, you know, Avalon buying, you know, Passa Lake's producing portfolio, and it looks like there may be some other portfolios that could be up for sale. Just wanted to get your thoughts just regarding M&A and just, you know, just consolidation, broader consolidation in the industry, you know, either as an acquirer of another let's store, what your thoughts are there, and then maybe even like as a seller, just what your thoughts are regarding consolidation in the industry, as a player. Yeah, Steve, you want to take that?
Speaker Change: Yeah, I didn't quite get the full tone of the question.
Speaker Change: I just wanted to get your consolidation, like, would you ever be interested in participating as an acquirer of another lessor, or even as a seller of, you know, a...
Speaker Change: of a maybe piece of your portfolio, you know, just your thoughts on the consolidation aspects of the business. Yeah, that's a good question. So we're constantly selling packages of aircraft.
Speaker Change: In many cases, those packages are meaningful to smaller lessors and investors and represent a significant
growth in their portfolios of aircraft.
We have looked at every.
leasing company acquisition opportunity in the last 14 years.
Speaker Change: And we have not found any thus far, including those that were acquired, where the acquisition of those companies would have been accretive to our financial position.
Speaker Change: We already have a very strong management team, a very strong ...
Speaker Change: marketing technical teams, so we don't really need to acquire another company to gain that talent.
Speaker Change: in 2020, 21, and 22. At a time when people were not buying airplanes, they were in stress, and that's when we placed the bulk of our backlog orders.
Speaker Change: So those things we cannot replicate using a third-party lessor. So therefore we have not really been able to pursue a transaction that makes sense for us.
Speaker Change: So we continue to sell assets, particularly our older assets, at significant gains as you saw this past quarter.
and we'll continue to enjoy the benefits.
Speaker Change: of the aircraft that we ordered years ago, where we're taking deliveries now at extremely attractive pricing that cannot be replicated by our competitors.
Speaker Change: I would just add to that that we always, as a management team, as a board, we always continue to look at all opportunities on the M&A side as well. And I do think as the industry continues to grow, there's just going to be an ongoing consolidation naturally that has been and will continue to take place.
Speaker Change: within the industry overall, especially as some of the smaller lessors consolidate and ramp up their scale and size. So, nothing unusual here.
Got it. Thank you. This was helpful.
We'll move next to Moshi Orenbush at TD Cowan.
Speaker Change: Great. Maybe following up on a couple of the earlier questions, the 50 or so planes that you have that end their lease terms in 2025, that's up significantly from 2024. You mentioned that a lot of them
Speaker Change: will stay with the current lessors. If those had been renegotiated during COVID, will the leases step back up? Like, how does that work?
you know, and how should we think about
Speaker Change: I get there may not be end-of-lease revenues, but if they were to renegotiate it lower, would they go back to where they were pre that renegotiation?
Speaker Change: Yeah, it's really simple. We reprice the market. We have to mutually agree on an extension rate. And that gives us a great opportunity to reprice the best that we possibly can to much more current market levels. So it's not a question of like...
Speaker Change: you know, just going back to what it was pre-COVID, etc. It's, we want to take advantage of the strong market today, and that's our focus.
Got it.
Speaker Change: Okay, well that's great. And I know you said that you didn't really want to talk, John, about the, you know, deliveries in 2025, but maybe if you could just talk about some of the factors, you know, that have gone on in the last few months.
now that you've got the Boeing strike at least over.
Speaker Change: in terms of the process, I guess, of getting back to normal or more normal in terms of deliveries. Maybe just talk about that a little bit further out than Q4. Sure. Look, on the risk side, one element that's in the back of our mind is
Speaker Change: While the Berlin strike is now over we had a work stoppage for a prolonged period of time
Speaker Change: That work stoppage flowed through to the second and third tier suppliers and, you know, much with a lot of negative financial consequences.
Speaker Change: It could be that as we look forward, not today, not the airplanes that are already sitting in line ready for delivery, but as we look forward three or four or five months, that may have a further impact on the supply chain to both.
production resumption
and with a super, super eye towards quality.
And, you know, we applaud those efforts a lot.
Speaker Change: And if it means that the ramp-up is a little bit more delayed because of a focus on quality, so be it. We count on quality. Our aircraft customers count on quality. Steve mentioned it earlier in his remarks as well, and that applies to Airbus as well.
Speaker Change: Hopefully, Boeing will be able to meet a reasonable acceleration time frame. I don't know what that's going to be. Perhaps it's a little quicker than what we might have originally considered. But if not, so be it.
Thanks very much.
We'll take our next question from Steven Trent at Citigroup.
Speaker Change: Good afternoon, gentlemen, and thanks very much for taking my question. The first I'm curious how you guys are are thinking about sort of long term.
optimal mix of
Speaker Change: free versus excuse me fixed rate versus floating rate that I think you said it's currently 20% floating you know and what do you think about this over time you know just trying to get it a high level handle
Speaker Change: how you're thinking about locking in those spreads versus making a call at least in a tacit sense on where interest rates you think are gonna go.
Speaker Change: Sure, I'll take that one. Our long-term fixed floating rate target's been 80-20 for at least 10, maybe 15 years. We typically reserve that 20% floating rate debt for our revolver draws and bank financings to...
Speaker Change: work in capital to buy airplanes from our order block. And then we typically, as we approach...
Speaker Change: We build a lot of liquidity and then we access the bond market to take those short-term borrowings out on a longer-term fixed rate basis.
Speaker Change: That's how we've been running the business all along. We had been running a little higher, but over time we've reverted back to our long-term target of 80-20.
The End
Greg Willis: Appreciate that, Greg. And just one more as my follow-up, you know, when you...
Speaker Change: Not you guys, but the least market around the world. You've had, you know, some
events here and there with
Speaker Change: problem airlines per se you know the most obvious one in Eastern Europe of course but has anything in the market that you've seen over the last two years given you a sense as to maybe taking a second look at your risk management policy you know any sort of sense as to whether you might pull the trigger more quickly taking your lease team off an account and putting a risk management team on to an account
Speaker Change: Look, that's something we manage daily and weekly here. I mean, there's really nothing new. I think in our management and board-level discussion, as I imagine in most global companies all over the world, we are looking more at geopolitical risk.
Speaker Change: take that very much into consideration. We see a growing appetite for aircraft and opportunities, for example, in Central Asia. That is emerging stronger than it was a year or two or three ago, and we think it's actually a pretty good area for development.
Um...
Speaker Change: And we have reduced, by design, our exposure in China quite substantially over the past four to five years.
Speaker Change: Because we started from a point where we were over-invested in China and we've now come down considerably on that to less than 5%.
Speaker Change: So I would say that we have an ongoing process here. Broadly, the regional outlooks have not changed all that much. Steve identified from IATA, for example, that the Asia-Pacific region is showing the strongest growth at 19%.
Speaker Change: So, we're concentrating our efforts there and in Europe, the Middle East has been rapidly growing as well. So, I would just say it's part of our ongoing calculus. With any and all political and geopolitical events, very much
Speaker Change: You know on the forefront on the forefront as we go day by day, and we'll be looking at that with You know obviously as we enter a new administration in Washington DC
Speaker Change: Just to add to that, John, I think it's no secret that our customer base is high yield in nature.
Speaker Change: It has been for many, many years, and we've designed the business to deal with that, the credit quality of our customers, by maintaining strong security packages, having incredible asset diversification, so our average customer hold is less than 1%, our average country exposure is less than 2%.
Speaker Change: And I think it goes without saying our biggest credit mitigate in itself is the aircraft that we have on our fleet, the youngest.
Speaker Change: most fuel-efficient, most technologically advanced, highest-in-demand aircraft. Those are assets that tend to do the best in times of stress with our airline customers. And right now we're sitting in a pretty good position, but we're always watching that, to John's point.
Really appreciate the color. Thank you.
We'll move next to Ronald Epstein at Bank of America.
Ronald Epstein: Hey, yeah, good afternoon, good evening, guys. Hi, Lon. A question, when would we expect to see the net interest margin reverse and start to rise?
Great.
Speaker Change: I mean, as I mentioned earlier, we haven't given guidance on long-term margins, but I think as our lease yields continue to improve...
The Fed continues to ease
Speaker Change: The big question is what happens with the yield curve, but I think we're moving in the right direction. So I think we'd like to see some expansion in the near term.
Speaker Change: Steve and John, what's your thoughts on the possibility of a third OEM? If there was a third OEM who could actually deliver airplanes right now, and maybe that's just a pipe dream because everybody's held up by...
Ronald Epstein: the supply chain. Would you be supportive of that or no? Dave? In some respects, yes, Ron. I mean, we do have two number three OEMs right now.
Ronald Epstein: Neither one is on a scale or level where they're truly able to compete.
Ronald Epstein: In terms of quantities and breadth of customers, Embraer and Comact
Uh.
Ronald Epstein: So, we're going to watch that carefully, and to the extent, Ron, that Boeing is not in a position right now, from all appearances, to launch
in the near term, a new
family of aircraft to replace the 737-757.
Sizemarket
It could be tempting.
Ronald Epstein: for someone to perhaps look at the feasibility of doing something.
that also has some technological leapfrogging.
Ronald Epstein: of the A320 Neo family, but that is an extremely difficult.
complicated
Ronald Epstein: and Capital Intensive, and you know as well as I right now, the regulatory climate both in the US and Europe.
on new aircraft are extremely
Ronald Epstein: difficult and challenging. Even the A321 Neo XLR took a lot longer to certify. Look at what's happened to the 737 MAX 7.
Ronald Epstein: which, to me, is probably the easiest derivative of the MAX-8. And Boeing has not been able to secure FAA certification, not even talking about the MAX-10 or the 777X.
So...
I think for a wealthy enterprise...
Ronald Epstein: Like a Tesla, for example, to launch a new aircraft would be a very courageous and risky step.
So what we look forward to is perhaps Embraer
Ronald Epstein: looking at ways to draw upon the fact that they've already built a worldwide.
Ronald Epstein: Product Support, Airline, AOG Support, Spare Support Organization, and if they could leverage that through some kind of a partnership with another entity, they could certainly become a number three player.
Ronald Epstein: Comac, I'd say we'll have to watch two things what the geopolitical climate vis-a-vis China
The U.S. and Europe.
Ronald Epstein: Bear in mind that a big value portion of the 919 is U.S. and European manufactured equipment, including the engines.
Ronald Epstein: and a lot of the avionics and landing gear and APU and so forth.
That's one to watch.
Ronald Epstein: They certainly are committed to becoming a major player, but that's going to take a long time for them to build up a global...
Ronald Epstein: Airlines support organization logistical network. Look how long it took Airbus. It probably took Airbus 15 to 20 years to get to the scale that they needed to be at.
to compete with Douglas and Boeing at that time.
Ronald Epstein: It'd be nice to see a third player, to keep everybody honest.
Ronald Epstein: But right now I'd say the headwinds, Ron, are greater than the tailwinds to do that.
Speaker Change: Got it. I don't know how you feel, but that's kind of a...
summarizes our impression.
Cool. Thank you.
Speaker Change: And there are no further questions at this time. Mr. Arnold, I'll turn the call since back over to you.
Mr. Arnold: Thanks, Audra. Thank you, everyone, for participating in our third-quarter call. We look forward to speaking to you again in February on our fourth-quarter call. Operator, please disconnect the line, and thank you again for your assistance.
Speaker Change: You're welcome. And this concludes today's conference call. You may now disconnect.
[music]